<PAGE>
===========================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934.
For the quarterly period ended April 30, 1999, OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934.
For the Transition Period From ____to ____ .
Commission File Number: 0-10370
ANDATACO, INC.
--------------
(Exact name of Registrant as specified in its charter)
MASSACHUSETTS 04-2511897
------------- ----------
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10140 MESA RIM RD., SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices and Zip Code)
(619) 453-9191
(Registrant's Telephone Number, including area code)
Indicate by a check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter periods that the
Registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. Yes [X] No [_]
As of May 26, 1999, there were 23,819,399 shares of the Registrant's common
stock, $0.01 par value, issued and outstanding.
================================================================================
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ANDATACO, INC.
FORM 10-Q
<TABLE>
<CAPTION>
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PAGE NO.
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet at April 30, 1999 (unaudited)
and October 31, 1998 3
Consolidated Statement of Operations (unaudited) for the
three-month and six-month periods ended April 30, 1999
and 1998 4
Consolidated Statement of Cash Flows (unaudited) for the
six-month period ended April 30, 1999 and 1998 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and reports on Form 8-K 12
Signatures
</TABLE>
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
ANDATACO, INC.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
- -------------------------------------------------------------------------------------------------------------------
APRIL 30, OCTOBER 31,
1999 1998
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash ................................................................................ $ 23,000 $ 23,000
Accounts receivable, net ............................................................ 6,257,000 10,628,000
Inventories ......................................................................... 6,451,000 4,923,000
Other current assets ................................................................ 1,056,000 634,000
----------- -----------
Total current assets .............................................................. 13,787,000 16,208,000
Goodwill, net ........................................................................ 5,156,000 5,993,000
Property and equipment, net .......................................................... 2,947,000 3,415,000
Other assets ......................................................................... 96,000 66,000
----------- -----------
$21,986,000 $25,682,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................................... $ 6,515,000 $ 7,853,000
Accrued expenses .................................................................... 2,420,000 2,610,000
Deferred revenue .................................................................... 2,102,000 2,259,000
----------- -----------
Total current liabilities ......................................................... 11,037,000 12,722,000
----------- -----------
Long-term liabilities:
Bank line of credit ................................................................. 5,000,000 5,462,000
Shareholder loan .................................................................... 5,196,000 5,196,000
----------- -----------
Total long-term liabilities ....................................................... 10,196,000 10,658,000
----------- -----------
Shareholders' equity:
Common stock ........................................................................ 238,000 238,000
Additional paid in capital .......................................................... 10,149,000 10,107,000
Accumulated deficit ................................................................. (9,634,000) (8,043,000)
----------- -----------
Total shareholders' equity ........................................................ 753,000 2,302,000
----------- -----------
$21,986,000 $25,682,000
=========== ===========
</TABLE>
See notes to unaudited consolidated financial statements.
3
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ANDATACO, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Sales $14,992,000 $20,996,000 $31,370,000 $42,756,000
Cost of sales 10,503,000 14,325,000 22,375,000 29,300,000
----------- ----------- ----------- -----------
Gross profit 4,489,000 6,671,000 8,995,000 13,456,000
----------- ----------- ----------- -----------
Operating expenses:
Selling, general and
administrative 4,879,000 6,048,000 9,432,000 12,463,000
Rent expense to shareholder 83,000 83,000 166,000 166,000
Research and development 184,000 473,000 506,000 914,000
----------- ----------- ----------- -----------
Total operating expenses 5,146,000 6,604,000 10,104,000 13,543,000
----------- ----------- ----------- -----------
(Loss) income from operations (657,000) 67,000 (1,109,000) (87,000)
Interest expense 120,000 139,000 248,000 288,000
Interest expense to shareholder 117,000 117,000 234,000 234,000
----------- ----------- ----------- -----------
Net loss $ (894,000) $ (189,000) $(1,591,000) $ (609,000)
=========== =========== =========== ===========
Net loss per share (basic
and diluted) $ (0.04) $ (0.01) $ (0.07) $ (0.03)
=========== =========== =========== ===========
Shares used in computing
net loss per share (basic
and diluted) 23,819,399 23,819,399 23,819,399 23,819,399
=========== =========== =========== ===========
</TABLE>
See notes to unaudited consolidated financial statements.
4
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ANDATACO, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
SIX MONTHS ENDED
APRIL 30,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,591,000) $ (609,000)
Adjustments to reconcile net loss to cash
provided by operating activities:
Depreciation 879,000 769,000
Amortization of goodwill 837,000 836,000
Stock compensation 42,000 -
Changes in assets and liabilities:
Accounts receivable 4,371,000 151,000
Inventories (1,528,000) 913,000
Other assets (452,000) (123,000)
Accounts payable (1,338,000) (803,000)
Accrued expenses (190,000) (610,000)
Deferred revenue (157,000) 666,000
----------- ----------
Net cash provided by operating activities 873,000 1,190,000
----------- ----------
Cash flows from investing activities:
Payments for purchases of property and equipment (411,000) (676,000)
----------- ----------
Net cash used in investing activities (411,000) (676,000)
----------- ----------
Cash flows from financing activities:
Payments under bank line of credit agreement (net) (462,000) (394,000)
Payments on notes payable - (141,000)
----------- ----------
Net cash used in financing activities (462,000) (535,000)
----------- ----------
Net change in cash - (21,000)
Cash at beginning of period 23,000 41,000
----------- ----------
Cash at end of period $ 23,000 $ 20,000
=========== ==========
</TABLE>
See notes to unaudited consolidated financial statements.
5
<PAGE>
ANDATACO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- -------------------------------------------------------------------------------
NOTE 1--BASIS OF PRESENTATION
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
The accompanying unaudited consolidated financial statements of Andataco, Inc.
("ANDA", or the "Company") have been prepared by the Company without audit
pursuant to the rules and regulations of the Securities and Exchange Commission
for Form 10-Q. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's annual report
on Form 10-K for the year ended October 31, 1998. In the opinion of management,
the accompanying unaudited consolidated financial statements contain all
adjustments, consisting of only normal recurring items, necessary for a fair
presentation of the Company's financial position as of April 30, 1999 and its
results of operations for the three-month and six-month periods ended April 30,
1999 and 1998. The interim financial information contained herein is not
necessarily indicative of the results to be expected for any other interim
period or the full fiscal year ending October 31, 1999.
NOTE 2--BUSINESS COMBINATION
On June 3, 1997 (the "Closing Date"), ANDA (formally IPL Systems, Inc.)
completed a business combination with ANDATACO of California, whereby ANDATACO
of California was merged with a wholly-owned subsidiary of ANDA (the "Merger").
Under the terms of the merger agreement, the shareholders of ANDATACO of
California were issued a total of 18,078,381 shares of ANDA Class A Common Stock
in exchange for all outstanding shares of capital stock of ANDATACO of
California. Although as a legal matter the Merger resulted in ANDATACO of
California becoming a wholly-owned subsidiary of ANDA, for financial reporting
purposes the Merger was treated as a recapitalization of ANDATACO of California
and an acquisition of ANDA by ANDATACO of California (reverse acquisition). The
financial reporting requirements of the Securities and Exchange Commission
require that the financial statements reported by ANDA subsequent to the Merger
be those of ANDATACO of California, which include the results of operations of
ANDA from the Closing Date.
The acquisition of ANDA by ANDATACO of California was accounted for using the
purchase method. Accordingly, the purchase price was allocated to the estimated
fair market value of identifiable tangible and intangible assets acquired and
liabilities assumed. Based upon an independent valuation, the Company allocated
$2,400,000 to acquired in-process research and development for which there is no
future alternative use and $400,000 to existing proprietary technology for which
technological feasibility had been established. As required by generally
accepted accounting principles, the amount allocated to in-process research and
development was recorded as a one-time charge to operations and the amount
allocated to existing technology was amortized over its estimated useful life.
The excess of the purchase price over the identifiable net assets acquired of
$8,362,000 was recorded as goodwill and is being amortized on a straight-line
basis over its estimated useful life of five years.
6
<PAGE>
ANDATACO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- -------------------------------------------------------------------------------
NOTE 3--NET LOSS PER SHARE
Basic earnings per share is computed based on the weighted average number of
shares of common stock outstanding during the period. Diluted earnings per
share is computed based on the weighted average number of shares of common stock
outstanding during the period increased by the weighted average number of common
stock equivalents outstanding during the period, using the treasury stock
method. Shares issuable upon exercise of outstanding stock options and
warrants, totaling 2,654,430 and 2,645,690 as of April 30, 1999 and 1998,
respectively, have been excluded from the computation of diluted earnings per
share, as their effect would be anti-dilutive.
NOTE 4--INVENTORIES
APRIL 30, OCTOBER 31,
1999 1998
----------- ----------
(unaudited)
Inventories are comprised of the following:
Purchased components ............................... $5,710,000 $3,900,000
Work in progress ................................... 114,000 280,000
Finished goods ..................................... 627,000 743,000
---------- ----------
$6,451,000 $4,923,000
========== ==========
NOTE 5--BORROWINGS
The Company has a revolving line of credit ("the Line of Credit") with a bank
which provides for the Company to borrow the lesser of (i) $10,000,000 or (ii)
80 percent of eligible domestic accounts receivable plus the lesser of
$1,750,000 or 25 percent of eligible inventory, at the bank's prime rate plus
one-half percent (8.5 percent at April 30, 1998.) The Line of Credit was
renewed in April 1998 for a thirty-six month period. The Line of Credit is
secured by all of the Company's property and accounts receivable and is
guaranteed by the Company's principal shareholder. At April 30, 1999, the
Company was not in compliance with the financial covenant concerning the
Company's minimum net tangible worth; however, effective June 11, 1999, the bank
notified the Company that it will temporarily waive its rights and remedies
associated with this default subject to further negotiations. The bank and the
Company are currently negotiating the terms and conditions of the temporary
waiver, which will include applying a default interest rate of 10.5% during the
waiver period.
NOTE 6--SUBSEQUENT EVENT
On June 9, 1999, nStor Technologies, Inc. acquired the 75.7% of the Company's
common stock held by the Company's principal shareholder.
7
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
consolidated financial statements included elsewhere within this quarterly
report. Fluctuations in annual and quarterly results may occur as a result of
factors affecting demand for the Company's products such as the timing of the
Company's and competitors' new product introductions and upgrades. Due to such
fluctuations, historical results and percentage relationships are not
necessarily indicative of the operating results for any future period.
The discussion contained in this report contains forward-looking statements
based on the current expectations of the Company's management. Such statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those projected. Factors that could cause or
contribute to such differences include but are not limited to, fluctuations in
the Company's operating results, continued new product introductions by the
Company, market acceptance of the Company's new product introductions, new
product introductions by competitors, technological changes in the computer
storage industry and other factors referred to herein, including but not limited
to, the factors discussed below and in the Company's Annual Report on Form 10-K.
Readers are cautioned not to place undue reliance on these forward-looking
statements which speak only as of the date hereof. The Company undertakes no
obligation to publicly release the result of any revisions to these forward-
looking statements which may be made to reflect events or circumstances
occurring after the date hereof or to reflect the occurrence of unanticipated
events.
OVERVIEW
The Company designs, develops, manufactures, markets and supports high
performance, high availability information storage solutions for the open
systems markets in the Windows NT and UNIX environments including Sun
Microsystems, Inc., Hewlett-Packard Company, Silicon Graphics, Inc., and NT-
based computing systems. The Company's fully integrated hierarchy of data
storage solutions includes fault-tolerant Redundant Array of Independent Disks
("RAID") and RAID-ready disk storage, tape backup and restore products and data
storage management software. The Company also provides technical support and
professional services for its products. The Company distributes internally
developed products and products from other manufacturers through a network of
sales offices worldwide and through distributors in Europe, Asia, Latin America,
Canada and Australia. The customers for the Company's products represent a
variety of industries and government agencies operating in distributed
client/server as well as centralized computing environments. These customers
range in size from FORTUNE 1000 companies to small businesses, and from national
to local governments.
GigaRAID High Availability Series
The Company's award winning Enterprise Storage Packaging ("ESP"), is the
framework of the Company's GigaRAID Series. ESP combines, for the first time,
microprocessors and enclosures to provide the user industry-leading, modular and
building block packaging combined with proactive, storage management
functionality. All critical components of the enclosure are monitored and a
"Call Home" feature alerts the user should any critical component go out of
specification.
GigaRAID/AA, the newest member of the GigaRAID Series, is a family of RAID and
RAID-ready disk and tape storage systems that are combined with the company's
ESP to create more complete storage solutions. The GigaRAID/HA provides high
performance and availability for database/On-Line Transactional Processing
applications characterized by small block/random data processing. Other GigaRAID
Series products, including the GigaRAID/SX, offer high performance and
availability for certain data warehouse, seismic processing and video
applications characterized by large block, sequential processing.
Historically, the reseller business or the sale of third party non-GigaRAID
products accounted for a substantial portion of the Company's revenues,
representing 37.2% of revenues in fiscal 1996 and declining
8
<PAGE>
to 34.6% and 33.4% in fiscal 1997 and 1998, respectively. Although the Company
plans to continue to sell third party products, management's strategy is to
focus increased resources on the design, development, manufacturing and
marketing of internally developed and GigaRAID products. For the six months
ended April 30, 1998 and 1999, revenue from sales of internally developed and
GigaRAID products represented 53.7% and 46.6% of total revenue, respectively.
SUBSEQUENT EVENT
On June 9, 1999, nStor Technologies, Inc. acquired the 75.7% of the
Company's common stock held by the Company's principal shareholder.
RESULTS OF OPERATIONS
The following table sets forth items in the Company's statement of operations
as a percentage of net sales for the periods presented. The data has been
derived from the unaudited condensed consolidated financial statements.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales ....................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ............................... 70.1 68.2 71.3 68.5
----- ----- ----- -----
Gross profit ................................ 29.9 31.8 28.7 31.5
Operating expenses:
Selling, general and administrative ....... 32.5 28.8 30.1 29.2
Rent expense to shareholder ............... 0.6 0.4 0.5 0.4
Research and development .................. 1.2 2.3 1.6 2.1
----- ----- ----- -----
Total operating expenses .................... 34.3 31.5 32.2 31.7
----- ----- ----- -----
Loss from operations ........................ (4.4) 0.3 (3.5) (0.2)
Interest expense ............................ 1.6 1.2 1.5 1.2
----- ----- ----- -----
Net loss .................................... (6.0)% (0.9)% (5.0)% (1.4)%
===== ===== ===== =====
</TABLE>
Second Quarter of Fiscal 1999 Compared to Second Quarter of Fiscal 1998
Sales. Sales for the three months ended April 30, 1999 were $14,992,000, a
decrease of 28.6% from sales of $20,996,000 for the same period in the prior
year. The decrease was primarily attributable to a decrease in sales of the
Company's GigaRAID product family. GigaRAID product sales were $7,102,000 in the
second quarter of fiscal 1999 compared to $10,740,000 in the second quarter of
fiscal 1998. This decrease is primarily attributable to the increase in
GigaRAID/AA product revenue not exceeding decreases experienced in other
GigaRAID products, primarily the GigaRAID/FT and GigaRAID/SA. The decrease in
sales of the current GigaRAID products was partially offset by a $356,000
increase in non-GigaRAID mass storage products, which includes RAID Lite, RAPID-
Tape, JBOD Disk and JBOT Tape, due to revenues from the GigaSTOR LVD product
line outpacing decreases in revenues from non-LVD mass storage products. Third-
party product sales decreased by $3,163,000, to $2,838,000 in the second quarter
of fiscal 1999 compared to $6,001,000 in the second quarter of fiscal 1998.
Revenues from OEM, software and services increased $168,000, $93,000 and
$180,000, respectively, from the second quarter of fiscal 1999 compared to the
second quarter of fiscal 1998. The decrease in third-party product revenues is
consistent with the Company's transition towards "owned solutions" strategic
technologies designed in-house to create technical, time-to-market and gross
margin advantages. By combining engineered technology with selected products
manufactured by its distribution and development partners, the Company believes
it provides a strong, sophisticated product line targeted to fast-growing
segments of the open systems storage market.
Gross Profit. Gross profit in the second quarter of fiscal year 1999 was
$4,489,000, representing approximately 29.9% of revenues, compared to $6,672,000
in the second quarter of fiscal 1998, which represented approximately 31.8% of
revenues. The decrease in gross profit as a percentage of sales was due
9
<PAGE>
primarily to a change in the product mix during the second quarter of fiscal
1999 compared to the second quarter of 1998. The Company's GigaRAID product
family sales accounted for 47.4% of revenues for the second quarter of fiscal
1999 compared to 51.2% of revenues in the second quarter of fiscal 1998. Non-
GigaRAID mass storage accounted for 19.7% of revenues for the second quarter of
fiscal 1999 compared to 12.4% of revenues in the second quarter of fiscal 1998.
The Company has historically earned higher margins on revenues from the GigaRAID
product family as compared to non-GigaRAID mass storage products.
Selling, General and Administrative Expense. Selling, general and
administrative expenses consist primarily of the salaries, commissions and
benefits of sales, marketing and customer support personnel and administrative
and corporate services personnel, as well as consulting, advertising, promotion,
and certain merger related expenses (i.e., goodwill amortization). Selling,
general and administrative expenses were $4,879,000 and $6,048,000 for the
quarters ended April 30, 1999 and 1998, respectively. The decrease in the
current period's selling, general and administrative expenses over such expenses
incurred in the comparable period of the prior fiscal year is due to decreased
compensation-related sales costs resulting from decreased staff and lower sales
volume.
Research and Development Expense. Research and development expenses consist
primarily of salaries, employee benefits, overhead and outside contractors. Such
expenses were $184,000 and $473,000 for the quarters ended April 30, 1999 and
1998, respectively. The level of research and development expenses is
consistent with the Company's strategy to continue to focus resources on
maintenance of in-house products and differentiating technologies for which it
believes there is a need in the market. However, there can be no assurance that
product development programs invested in by the Company will be successful or
that products resulting from such programs will achieve market acceptance.
Interest Expense. The decrease in interest expense of $19,000 in the second
quarter of fiscal 1999 from $256,000 in the comparable period in fiscal 1998 is
due primarily to the reduction in the outstanding portion of the Company's bank
line of credit.
First Six Months of Fiscal 1999 Compared to First Six Months of Fiscal 1998
Sales. Sales for the six months ended April 30, 1999 were $31,370,000, a
decrease of 26.6% from sales of $42,756,000 for the same period in the prior
year. The decrease was attributable to a decrease in sales of the Company's
GigaRAID product family. GigaRAID product sales were $16,851,000 in the first
six months of fiscal 1999 compared to $19,927,000 in the first six months of
fiscal 1998. This decrease is primarily attributable to the increase in
GigaRAID/AA product revenue not exceeding decreases experienced in other
GigaRAID products, primarily the GigaRAID/FT, GigaRAID/SA and GigaRAID/HA. The
decrease was also attributable to a decrease in sales of non-GigaRAID mass
storage products including RAID Lite, RAPID-Tape, JBOD Disk and JBOT Tape. Non-
GigaRAID mass storage product sales were $5,038,000 in the first six months of
fiscal 1999 compared to $7,761,000 in the first six months of fiscal 1998. In
addition third-party product sales decreased by $6,277,000, from $5,612,000 in
the first six months of fiscal 1999 compared to $11,889,000 in the first six
months of fiscal 1998. The decrease in non-GigaRAID mass storage and third-party
product sales is consistent with the Company's strategy to focus increased
resources on internally designed products, including the GigaRAID product
family, capable of producing higher margins. This is also consistent with the
Company's transition towards "owned solutions" strategic technologies designed
in-house to create technical, time-to-market and gross margin advantages. By
combining engineered technology with selected products manufactured by its
distribution and development partners, the Company believes it provides a
strong, sophisticated product line targeted to fast-growing segments of the open
systems storage market.
Gross Profit. Gross profit in the first six months of fiscal year 1999 was
$8,995,000, representing approximately 28.7% of revenues, compared to
$13,456,000 in the first six months of fiscal 1998, which represented
approximately 31.5% of revenues. The decrease in gross profit as a percentage of
sales was due primarily to a change in product mix within the GigaRAID product
family. Distribution GigaRAID products, which have traditionally earned lower
margins that internally designed and manufactured GigaRAID products, increased
4.9% as a percentage of sales during the first six months of fiscal 1999
compared to the same period in the prior fiscal year. The Company's GigaRAID
product
10
<PAGE>
family sales accounted for 53.7% of revenues for the first six months of fiscal
1999 compared to 46.6% of revenues in the first six months of fiscal 1998.
Selling, General and Administrative Expense. Selling, general and
administrative expenses consist primarily of the salaries, commissions and
benefits of sales, marketing and customer support personnel and administrative
and corporate services personnel, as well as consulting, advertising, promotion,
and certain merger related expenses (i.e., goodwill amortization). Selling,
general and administrative expenses were $9,432,000 and $12,438,000 for the six
months ended April 30, 1999 and 1998, respectively. The decrease in the current
period's selling, general and administrative expenses over such expenses
incurred in the comparable period of the prior fiscal year is due to decreased
compensation-related sales costs resulting from decreased staff and lower sales
volume.
Research and Development Expense. Research and development expenses consist
primarily of salaries, employee benefits, overhead and outside contractors. Such
expenses were $506,000 and $914,000 for the six months ended April 30, 1999 and
1998, respectively. The level of research and development expenses is
consistent with the Company's strategy to continue to focus resources on
maintenance of in-house products and differentiating technologies for which it
believes there is a need in the market. However, there can be no assurance that
product development programs invested in by the Company will be successful or
that products resulting from such programs will achieve market acceptance.
Interest Expense. The decrease in interest expense of $40,000 in the first six
months of fiscal 1999 from $522,000 in the comparable period in fiscal 1998 is
due primarily to the reduction in the outstanding portion of the Company's bank
line of credit.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash remained at $23,000 as of April 30, 1999 and as of October
31, 1998. Net working capital decreased $736,000 to $2,750,000 as of April 30,
1999 from October 31, 1998. During the first six months of fiscal 1999, the
Company generated $873,000 from operating activities, which was used for
investment in property and equipment of $411,000 and for payments to reduce the
bank line of credit of $462,000.
The Company currently maintains a credit facility that permits borrowings of
the lesser of $10,000,000 or a percentage of eligible accounts receivable and
inventory ($6,057,000 available at April 30, 1999). As of April 30, 1999, the
Company had $5,000,000 outstanding under this credit line. The credit facility
expires on April 30, 2001; consequently borrowings under this line have been
classified as long-term.
The Company believes that its projected income and its bank line of credit
will be sufficient to meet the Company's capital and operating requirements for
the next twelve months. If sales are less than projected, or if the Company is
unable to generate adequate cash flows from its sales, the Company may need to
seek additional sources of capital and/or decrease its planned capital and
operating expenditures.
A shareholder loan to the Company's president and principal shareholder is
unsecured, due in June 2004, with interest payable monthly at 9 percent per
annum. This loan is subordinate to the bank line of credit.
INCOME TAXES
The Company records a provision (benefit) for income taxes using the liability
method. Current income tax expense or benefit represents the amount of income
taxes expected to be payable or refundable for the current year. A deferred
income tax liability or asset is established for the expected future
consequences resulting from the differences between the financial reporting and
income tax bases of assets and liabilities and from net operating loss and
credit carryforwards. Deferred income tax expense or benefit represents the net
change during the year in the deferred income tax liability or asset. A
valuation allowance is established when necessary to reduce deferred tax assets
to the amounts expected to be more likely than not realized.
11
<PAGE>
YEAR 2000
Many current computer systems and software products were not designed to
handle any dates beyond the year 1999. As a result, computer systems and/or
software used by many companies may need to be modified prior to the Year 2000
in order to remain functional. Significant uncertainty exists in the hardware
and software industry concerning the potential effects associated with such
compliance.
In mid-1997, the Company formed an internal task force to evaluate those areas
of the Company that may be affected by the Year 2000 problem and devised a plan
for the Company to become Year 2000 compliant in a timely manner (the "Plan").
The Plan focuses on three major areas: the Company's mission critical business
transaction systems; the products the Company sells; and the issues associated
with its business partners, including suppliers, customers and bankers. To
date, the Company has executed approximately 95% of its Plan and anticipates
completing the remaining portions of the Plan by the end of the second calendar
quarter of 1999, while the evaluation and testing of certain ancillary PC office
and specialized PC applications will continue through 1999.
Costs incurred directly related to the Year 2000 problem are expensed by the
Company during the period in which they are incurred. The Company has incurred
to date no incremental material costs associated with its efforts to become Year
2000 compliant, as a majority of the costs have occurred as a result of normal
upgrade procedures. Costs incurred relating to the Year 2000 issue include the
time spent by employees reviewing and addressing Year 2000 risks and amounted to
$20,000 in fiscal 1998 and $5,000 for the first six months of fiscal 1999.
Based on current information, the Company does not expect future costs to
address Year 2000 risks to be material. However, there can be no assurances
that there will not be interruptions or other limitations of financial or
operating systems or that the Company will not incur significant costs to avoid
such interruptions or limitations. The Company's expectations about future
costs associated with the Year 2000 problem are subject to uncertainties that
could cause actual results to have a greater financial impact than currently
anticipated. Factors that could influence the amount and timing of future costs
include but are not limited to the success of the Company's suppliers in
completing their respective plan of action for Year 2000 compliance.
Mission Critical Business Transaction Systems
The Company has completed a review of its critical business transaction
systems, and its Year 2000 compliance related to business transaction systems is
as follows:
All of the Company's systems for processing business transactions are Year
2000 compliant and the Company expects that these systems will correctly process
transactions prior to and following 12:00 am January 1, 2000. This compliance
extends to the underlying hardware, operating systems, and other software on
which the Company's business systems operate. This compliance includes the
following transactions and related printed documents: accepting orders from
customers, fulfilling customer orders, invoicing customers, crediting customer
accounts, applying customer payments, refunding customers, placing orders with
vendors, receiving vendor shipments, processing vendor invoices and paying
vendors.
The Company is in the process of evaluating certain ancillary PC office
applications (e.g. word processing, spreadsheets, e-mail etc.) and specialized
PC applications including art, drawing and other creative department
applications, hardware design and other engineering department applications,
software development systems, bank account management, fixed asset management,
and stock option database management. This effort will continue through 1999
and is expected to be completed by the end of the calendar year 1999.
Products the Company Sells
The Company has also completed a review of all significant products the
Company sells for Year 2000 compliance. All significant products that the
Company currently sells are Year 2000 compliant and the
12
<PAGE>
Company believes these products will not produce date errors in changing from
the year 1999 to 2000. Any products the Company intends to sell in the future
will be reviewed for Year 2000 compliance. The functionality of all of these
products, however, are dependent on the software compliance of the underlying
operating systems.
The Company's Business Partners
The Company's suppliers (particularly sole-source and long lead-time
suppliers), key customers and other key business partners (e.g. bankers) may be
adversely affected by their respective failure to address the Year 2000 problem.
Should any of the Company's suppliers encounter Year 2000 problems that cause
them to delay manufacturing or shipments of key components to the Company, the
Company may be forced to delay or cancel shipments of its products, which could
have a material adverse effect on the Company's results of operations. Any
inability of the Company's key customers to become Year 2000 compliant which
would cause them to delay or cancel substantial purchase orders or delivery of
the Company's products could also have a material adverse effect on the
Company's results of operations. Additionally, any inability of the Company's
other key business partners, including the Company's bank, to become Year 2000
compliant could cause them to become unable to provide critical business
services, such as to provide funding on the Company's line of credit, and could
therefore also have a material adverse effect on the Company.
The Company does not rely on any one significant customer (i.e. representing
greater than 10% of total revenue). However, it is unknown how customer spending
patterns may be impacted by Year 2000 programs. As customers focus on preparing
their businesses for the Year 2000 in the near term, capital budgets may be
spent on remediation efforts, potentially delaying the purchase and
implementation of new systems, thereby creating less demand for the Company's
products and services. This could adversely affect the Company's business.
Conversely, demand for the Company's products could accelerate as customers
focus on the need to protect their stored data by enhancing their capabilities.
The Company has contacted all identified key vendors and business partners and
obtained either a statement of Year 2000 compliance or a status report on the
progress achieved to date on execution of their respective Year 2000 Plan. Based
on this review, the Company is satisfied that all identified key vendors and
business partners have satisfactorily addressed their Year 2000 issues with a
plan of action as applicable and are, or will be, Year 2000 compliant by the end
of the third calendar quarter of 1999.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
On April 8, 1999, the Company held its Annual Meeting of Shareholders. At the
meeting, the shareholders approved management' slate of directors and the
ratification of the Company's independent accountants with the following vote
distribution:
<TABLE>
<CAPTION>
Broker
Item Affirmative Negative Withheld Non-Vote
- ------------------------------------------ ----------- -------- -------- ---------
<S> <C> <C> <C> <C>
Election of Board of Directors
Harris Ravine 21,593,709 122,103
W. David Sykes 21,593,509 122,303
Cornelius McMullan 21,593,709 122,303
Melville Straus 21,593,709 122,303
Other Matters
Reappoint Price Waterhouse LLP
as independent auditors for fiscal
year 1999 21,625,597 84,300 5,915 2,103,587
</TABLE>
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.
---------------------------------
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ANDATACO, INC.
Date: June 14, 1999 By: /s/ Harris Ravine
------------------------------
Harris Ravine
Chief Executive Officer
(on behalf of registrant and
as its principal executive
officer)
Date: June 14, 1999 By: /s/ Diane Wong
------------------------------
Diane Wong
Vice President of Finance and
Corporate Controller
(on behalf of registrant and as
its principal financial officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> FEB-01-1999
<PERIOD-END> APR-30-1999
<CASH> 23,000
<SECURITIES> 0
<RECEIVABLES> 6,257,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,787,000
<PP&E> 2,947,000
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<CURRENT-LIABILITIES> 11,037,000
<BONDS> 0
0
0
<COMMON> 238,000
<OTHER-SE> 515,000
<TOTAL-LIABILITY-AND-EQUITY> 21,986,000
<SALES> 14,992,000
<TOTAL-REVENUES> 14,992,000
<CGS> 10,503,000
<TOTAL-COSTS> 5,146,000
<OTHER-EXPENSES> 0
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<INCOME-PRETAX> (894,000)
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<EPS-BASIC> (0.04)
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</TABLE>
